Available Industrial Space Plunges in OC

ORANGE COUNTY, CA-Vacancy for available space in the industrial market here has decreased from 7.3% to 5.7% over the past year, Jerry Holdner, VP of market research for Voit Real Estate Services, tells GlobeSt.com. Absorption for this type of space will come in just shy of 2 million square feet for 2013, whereas that figure was around 1 million square feet for 2012.

“It's going to be a tough year because of the lack of supply,” says Holdner. “We'll start seeing some more construction I'm predicting in the second half of next year, but there will probably be about 1 million square feet of absorption next year—not from lack of demand, but lack of supply.”

As GlobeSt.com reported earlier this week, continued warehouse vacancy improvement is anticipated in Orange County, according to Voit. The firm says vacancies have pulled in by nearly 2 percentage points from the peak of the cycle and should continue to fall gradually as long as consumers keep spending, companies keep hiring and development remains muted.

Overall industrial vacancy has gone from 4.7% to 4.2% over the last four quarters, says Holdner, and development has been delayed as the market has waited for rental rates to rise. “We had to wait for lease rates to come up in order for construction to pencil. Replacement cost was higher than sale prices. But now that prices are going up …”

The problem on the construction side is finding sites on which to build industrial, and the demand for what will be built is so high that vacancy will continue to decrease through next year, Holdner adds. “I predict we'll be in the 3.9% range for vacancy by the end of 2014.”

The investment market for industrial has been slow because of the lack of product for sale, but this may change as prices rise. “Higher pricing will bring out sellers,” says Holdner. “As pricing goes up, there will be more people willing to sell. The problem is where are they going to move?”

He adds that the lower-end market, containing buildings of less than 50,000 square feet, has picked up some transactions recently, and there is less available space in this size range, “but there's strong demand in that 50,000-200,000-square-foot range.”

Holdner tells GlobeSt.com that only 94 out of the total inventory of 3,309 industrial buildings in Orange County that are less than 10,000 square feet are for sale, representing 2.84% of the stock. In the 10,000-50,000-square foot range, 110 out of 5,193 buildings (2.14%) are for sale; while in the 50,000+-square-foot range, 36 out of 915 buildings (3.93%) are for sale. Combined, 241 industrial buildings out of 9,417 total (2.56%) are for sale in the county.

Of the industrial buildings currently for sale in Orange County, many are in escrow or functionally obsolete, “therefore the market for buildings for sale is much tighter than the numbers suggest,” Holdner says. “As pricing increases, we should begin to see more projects break ground going into 2014. But there's a lack of developable sites, and many cities are increasing development fees, which is creating barriers to new development. Therefore, we will see some new construction in 2014, just not a lot of new industrial construction.”